TREASURIES-Prices narrowly lower as strong auction cuts early losses

Reuters Staff

4 Min Read

* Strong 30-yr bond auction lifts prices from session lows
* Yields near highest in 2 weeks on talk of debt ceiling
resolution
* Fed bought $1.38 billion in TIPS due 2028-2043
* Debt ceiling extension pushes T-bill pressure to Nov/Dec
By Karen Brettell
NEW YORK, Oct 10 (Reuters) - U.S. Treasuries yields briefly
rose to their highest levels in more than two weeks on Thursday
amid talk Congress could agree to raise the debt ceiling, but
the lower prices and higher yields drew buyers to the Treasury's
$13 billion 30-year bond auction and lifted prices from the
day's lows.
"The bond auction was well bid for at the bidding deadline
and very decent demand from real money accounts carried the
auction to better levels," said Thomas di Galoma, co-head of
fixed income rates at ED&F Man Capital in New York.
Treasuries had traded weaker before the auction and built in
a concession, said Ian Lyngen, Treasury strategist at CRT
Capital Group in Stamford, Connecticut. Prices bounced from the
lows following the sale, "plus a debt-ceiling deal seems
increasingly difficult," he said.
While the failure to raise the debt ceiling could trigger a
default on U.S. Treasury debt coming due in the near future,
anxiety about such an event prompts a liquidity bid for U.S.
debt farther out on the maturity curve, tending to raise the
price of U.S. debt and put downward pressure on yields.
That has led to the short end of the yield curve inverting
since yields on U.S. debt due the soonest must compensate for
the risk of late payment.
Selling picked up in overnight trading after Treasuries
yields broke above their recent support levels. But it tapered
off before the 30-year bond sale on Thursday.
Benchmark 10-year notes were last down 6/32 in
price to yield 2.69 percent, still just above a recent technical
support level of around 2.68 percent.
"After breaking above that level some sell stops were hit,
which kept the market falling overnight," said John Canavan,
fixed income analyst at Stone & McCarthy Research Associates in
Princeton, New Jersey.
Thirty-year bonds, however, erased an early loss
and were up 1/32 after the bond sale, yielding 3.74 percent.
Treasuries have largely traded sideways for the past two
weeks, with many investors reluctant to enter new trades due to
the political stalemate in Washington.
The U.S. government entered its tenth day of partial
shutdown on Thursday and fears have been rising that the
political conflict could keep the debt ceiling from being raised
and lead to a default on some short-term U.S. debt, an event
that would undermine needed confidence in a benchmark asset to
which all other financial markets are connected.
The current on-the-run one-month Treasury bill yields
, which mature on November 7, traded at 0.25 percent
on Thursday, below a five-year high of 0.36 percent on Tuesday.
The cost to finance overnight trades backed by Treasuries in
the repurchase agreement market also shot higher on Thursday,
opening at around 27 basis points before falling back to around
10 basis points, said traders.
Banks and money funds have begun to stipulate that they
won't accept Treasuries at risk of delayed payments to back repo
loans.
The Federal Reserve bought $1.38 billion in Treasury
Inflation-Protected Securities (TIPS) due from 2028 to 2043 on
Thursday as part of its ongoing purchase program.